Gulf neighbours are expected to demand further economic reforms in Bahrain, the region’s smallest economy, to justify continued financial support, according to a new report.
Bank of America Merrill Lynch’s MENA economist Jean Michel-Saliba said that while GCC support remains firm in the near-term, over time, the GCC is likely to require from Bahrain greater reforms to restore sustainability.
His report said GCC development funds have stepped up their grant disbursements to Bahrain since 2015. A total of $0.2 billion and $0.7 billion were paid by the Saudi, UAE and Kuwaiti development funds in 2015 and 2016 respectively.
As of end-2016, GCC development funds have allocated $6.2 billion in funds and awarded $3.1 billion in projects to support the Bahraini economy.
The recent Gulf tour of Bahrain’s Crown Prince Salman Al Khalifa to Saudi Arabia, Qatar, Kuwait and the UAE over February-March is positive in view of securing continued support, the report said.
However, it added that Qatar financial support appears unlikely given that Bahrain is in negotiations to buy LNG from Russian producers.
Bank of America Merrill Lynch noted that fundamentals in Bahrain have “deteriorated faster than expected”, adding that it does not yet sense there is a “material and credible medium-term fiscal adjustment plan”.
The 2017-2018 fiscal budgets being currently prepared are crucial, but could disappoint, the report said.
It added that real GDP growth stood at 3 percent in 2016, marginally higher than the 2.9 percent rate recorded in 2015.
“Economic diversification has helped as the key main sectors leading economic activity have been construction, real estate and onshore financial institutions while hospitality and manufacturing slowed down,” it said.
Major projects such as the new 400,000 bpd Saudi-Bahrain pipeline, the Sitra oil refinery, Aluminum Bahrain and Bahrain International Airport expansions are proceeding ahead and will support activity going forward.
The report added: “Our impression is that fiscal consolidation remains socially challenging… The guiding principle for the subsidy reform appears to be that further adjustments have to be accompanied by means-tested allowances for nationals while expatriates would pay services at cost. Building a safety net could however take time, while fiscal consolidation needs are pressing.”
Bank of America Merrill Lynch said the bulk of the planned spending adjustment in the period to 2021 is targeted to come from subsidy cuts and it will be key to monitor whether these measures are legislated in 2017.